Athens turned up the heat on its creditors on Tuesday as it sought to secure a bond swap that will cut its mountainous debt, while the main bondholders group warned a disorderly default would cause more than a trillion euros of damage to the euro zone.
Greek private creditors have until Thursday night to say whether they will participate in the exchange that is a key part of a bailout programme to help Greece manage its wrecked finances and meet a debt repayment on March 20.
A number of the biggest bondholders are signing up but despite the dire warnings, a clutch of Greek pension funds and some foreign investors rejected the offer which will see investors lose almost three-quarters of the value of their holdings and lop about 100 billion euros off Greece's debt.
Athens ratcheted up the pressure, delivering its starkest signal to date that it will force losses on those who do not volunteer.
Its Debt Management Agency (PDMA) said if it got enough support, it intended to make losses "binding on all holders of these bonds" and said the offer was the best deal they would get, echoing comments by Finance Minister Evangelos Venizelos to Reuters on Monday.
Analysts said an Institute of International Finance document, marked "IIF Staff Note: Confidential", seemed designed to alarm investors into participating in the exchange by estimating the extent of havoc a disorderly default would wreak.
"It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros," the IIF, which represented private creditors in months of tortuous debt negotiations with Athens, said in the Feb. 18 document obtained by Reuters.
If Greece misses the March 20 payment without a deal in place and succumbs to a hard default, it could be taken as a sign that politicians have lost control of the crisis again, prompting investors to target other weak euro zone countries.
Spain and Italy might require 350 billion euros in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total 380 billion euros over five years.
"When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union," it said.
The bank lobby group also said bank recapitalisation costs could easily hit 160 billion euros if no swap is agreed.
"Obviously the report is written on a worst-case basis to try and encourage participation in the exchange," said Gary Jenkins, analyst at Swordfish Research.
Greece hopes the exchange will mark a turning point as it enters a fifth year of recession but not all its creditors are willing to take the bond exchange, raising the prospect of Athens forcing them to by legal means, which could become a messy process.
Greek banks, holding 40-45 billion euros of the sovereign bonds, will all take part in the offer, banking sources said. Athens later confirmed its six biggest banks would take part in the swap, and Italy's largest bank by assets, UniCredit, said it would participate.
Nine more major Greek bondholders, all on the IIF steering committee that helped draw up the deal, said on Monday they would support the swap.
The Greek banks and other steering group members hold about 30 percent of the 206 billion euros of bonds in circulation.
Most Greek pension funds will also sign up but four funds with bonds worth about 2 billion euros have refused to do so, a Greek official said. The funds have come under pressure from labour unions worried the writedown on Greek debt holdings will undermine their viability.
Investors in a Swiss-law governed Greek government bond have teamed up to challenge the terms of Athens' proposed bond swap, highlighting the wave of litigation it could yet face, particularly over the minority of its debt not issued under Greek law.
Greece wants a take-up of 90 percent or more, and if it falls below that but exceeds 75 percent it is expected to use collective action clauses (CACs) to force losses on all. It could trigger CACs on Greek law bonds, which account for 177 billion euros of the total, with two-thirds acceptance.
Below that level, the deal could be off, potentially plunging the euro zone back into crisis.
The Greek finance ministry denied speculation that it was planning to extend the deadline on the offer, highlighting the jittery mood just two days before final decisions are due.
"The most likely outcome may well be that Greece passes its 75 percent target and then uses CACs to ensnare the remainder," Jenkins said.
Greece needs to reach that target to ensure it makes the savings agreed under its 130 billion euro bailout deal.
Using the CACs would probably trigger payouts on bond insurance contracts (CDS) and would also increase the chance of hedge funds or other bondholders pursuing legal action.
Complicating the process is the fact that most of the bonds fall under Greek law, but the remainder are under English law.
The deadline for acceptances is 2000 GMT on Thursday, although the foreign law bondholders must hold approval meetings March 27-29 so they would settle at a later date.